Consider a one-year coupon bond that has a present value of $2,000.If the annual rate of discount is 5 percent, and the payment made at the end of each year is $140, the principal amount to be repaid at the end of one year is

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Quizplus · Accepted Answer

The principal amount to be repaid can be calculated by subtracting the annual payment from the present value and then adjusting for the discount rate. The present value is $2,000, and the payment is $140. Therefore, the amount before the payment is $2,000 + $140 = $2,140. Since the bond is at a 5% discount rate, the principal to be repaid is the present value minus the payment, which is $2,000 - $140 = $1,860. However, considering the correct approach involves directly calculating the principal from the given information without the need to adjust for the payment in this manner, the correct calculation should directly relate to the present value and the discount rate, leading to a misunderstanding in the explanation provided. The correct principal amount is actually derived by understanding that the present value of the bond is the sum of the present value of the principal and the present value of the coupon payment. Given the error in the initial explanation, the correct principal amount considering a 5% discount rate and a $140 coupon payment is indeed closer to the options provided, reflecting a calculation based on the bond's present value and the discount rate applied correctly.

Consider a One-Year Coupon Bond That Has a Present Value